What should the federal government do to address the inventory of foreclosed properties?
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Since the bursting of the housing bubble, the number of vacant homes, held off the market, has increased over 1.6 million, while the number of vacant homes for sale or rent has increased almost 800,000. Clearly we have a surplus of housing. Not all, but many of these are vacant as the result of foreclosure. Once they have completed the foreclosure process, these homes will add to supply, potentially depressing prices further.
In and of itself, additions to housing supply are not the end of the world. Price declines would increase affordability for the many families who remain priced out of the market. The central problem is that these potential price declines are almost certain to occur at some point, but exactly when remains a mystery. Buying into today’s market implies taking considerable risk of deprecation. Accordingly many buyers remain on the sidelines. Moving foreclosures back into the market is essential to having prices that accurately reflect fundamentals.
One option being widely considered is the bulk sale of vacant homes owned by Fannie Mae, Freddie Mac and the FHA. As these three entities hold about half of the vacant REOs such an effort could have an immediate and sizable impact on the housing market. For such an effort to succeed however, Washington must resist the temptation to micro-manage and politicize the process. Placing numerous restrictions, such as income requirements or creating preferences for non-profits and local governments, would greatly hamper the effort’s effectiveness. One only need study the failures of HUD’s Asset Control Areas program to recognize the harm such an approach could inflict. The best path to take would be large, unsubsidized bulk sales to investors.
Currently vacant homes are only part of the problem. My best guess is that about 500,000 borrowers still residing in the home have not made a payment in over two years. It is difficult to see such borrowers ever becoming current. CoreLogic estimates that pending supply, or shadow inventory, is about 1.6 million units. After years of attempting to delay the inevitable, we should focus on bringing this shadow inventory to market sooner rather than later. Of course such would result in near-term price declines, but would also reduce the uncertainty surrounding future prices with the result of increasing buyer confidence.
While I believe we’ve wasted enough tax dollars on propping up the housing market, if Washington insists on a continued taxpayer rescue, then such measures should be used to directly help those most in need, such as the homeless or low-income renters, temporarily occupy foreclosed properties, preferably via the use of vouchers.
Despite repeated claims otherwise, housing works like every other market. The only way to clear an excess supply is a further reduction in prices. While the federal government can help to move the shadow inventory into the visible inventory, we must resist the urge to fight the fundamentals. Efforts to re-inflate the bubble and delay price or inventory adjustments will ultimately result in far more harm than good.
Mark A. Calabria is Director of Financial Regulation Studies at the Cato Institute.
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